Our tax system

At a glance

A good tax system raises the revenue needed to finance government activities without imposing unnecessary costs on the economy. Tax reform is about how revenue is raised, not just about how much.

Australia’s overall tax burden is relatively low compared with other developed countries and regional competitors. The federal Government raises around 81 per cent of total tax revenue in Australia. State and Territory governments receive 45 per cent of their revenue through transfers from the federal Government, including all GST revenue.

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Percentage

Personal income tax

39

Company tax

19

Other federal taxes

11

GST

12

State and local taxes

19

Note: Percentages may not sum up to 100 per cent due to rounding.

Source: ABS, Taxation Revenue, 2012-13.

Australia relies heavily on individuals’ and corporate income taxes compared with other developed countries, as well as some regional competitors. Australia’s reliance on individuals and corporate income taxes remains much the same as it was in the 1950s, despite the significant change to the economy. This reliance is projected to increase further, largely due to wages growth and individuals paying higher average rates of tax (bracket creep).

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Denmark

Australia

United States

Canada

Singapore

United Kingdom

India

Japan

Germany

Korea

France

China

OECD average

Company taxes

6.3

18.9

10.2

9.5

29.3

8.1

22

12.5

4.8

14.9

5.6

8.5

Personal income taxes

50.7

39.2

37.7

36.6

15.4

27.5

11.2

18.6

25.6

15

18

24.5

Unallocated

4.9

1.1

0.3

19.8

0.6

Note: Income taxes do not include payroll tax or social security contributions. Statistics for non-OECD and OECD countries may not be directly comparable

Source: OECD, Revenue Statistics; Treasury estimates using IMF, Government Finance Statistics, and Centre for Monitoring the Indian Economy database.

Economic modelling shows that company tax and stamp duties in particular affect economic growth. The entire economy benefits from reducing the economic costs of taxation, including workers through higher wages.

Much of the burden of Australia’s high company tax rate is expected to fall on Australian workers. This is because, over time, the amount of capital investment in Australia (for example, the construction of buildings and purchase of equipment for production) is affected by the company tax rate. Lower amounts of capital investment in the Australian economy will reduce the output or productivity of workers and, in turn, reduce the real wages of employees.

A growing problem is the increased complexity and compliance costs in the tax system. Tax compliance costs are in the order of $40 billion per year. Reducing complexity requires change to tax design and governance practices.

Australia’s tax and transfer systems are highly progressive, which supports fairness. High effective tax rates, including as a result of targeting in the transfer system, can reduce participation incentives for some groups. Bracket creep exacerbates this problem.

Tax settings for savings should give people the incentive to save for their future, but differences in the taxation of alternative savings vehicles affects savings choices.